Tuesday, 12 December 2017

Bitcoin bubble - will it be anothe Long-Term Capital Management

Many moons ago, indeed decades now, there was a hedge fund that managed to leverage itself up so much that it caused a massive loss in Wall Street and even led to the resignation of the Chairman of UBS.

So, is this time different?

Bitcoin is a classic tulip-bubble mania. There is a limited supply, there is some kind of magic involved, retail investors are sucked in and there is plenty of liquidity in the market to push the currency on.

Of course, historically most of the bitcoins have been used by mafia and corrupt governments as a means of washing illegal gains. But these players have had ample opportunity this year to clear out, at a massive profit too!

So now the base is increasingly retail investors and some more risky financial broker-dealers who smell trading profits.

With the CME now allowing shorting of Bitcoin for the first time, there may well be hedge funds who come into the market now to take a bet on the collapse.

The danger though is that bitcoin is now worth some $270 billion and this changes rapidly daily. Ina major crash there is a lot of money to be destroyed. LTCM only burned through around $4 billion in 1998!

Over the course of this week the meteoric rise of bitcoin does seem to have stopped with the CME entry to the market and it is now stable at around $17000 per bitcoin.

One key element that may help stop a big impact if there were to be a run on bitcoin is that most holders would be sitting on paper losses only - in that most coin were created or traded at much lower values, thus the losses are not real in the sense of investment money going south.

But a 50% crash in the price (which is nothing when it has gone up 1700% this year) would be a big hit - I wonder where the bodies would be because there would definitely be some big hits with $130 billion of losses to share around

28 comments:

david morris
said...

"Roughly 40% of the cryptocurrency is owned by 1,000 people, claims Aaron Brown, head of financial markets research at AQR Capital Management. In such an unregulated market, Brown said large holders of bitcoin could potentially be working together to orchestrate price changes."

??? You mean they are selling futures contracts for the first time. There have never been any laws against shorting physical BTC if you can find a lender and IG index have been offering short cfds for a good while now. There are also ETF's and trusts containing bitcoin that can be shorted if you can find a lender or via a cfd.

there is plenty of liquidity in the market to push the currency on

Is there? There are lots of rumours of wash trading for a start. And then there what I call the computer game nature of the crypto exchanges. You deposit 'fiat' and then you play an endless game of swapping BTC for other coins and tokens. If you want to sit in dollars again you use 'tether' a crypto currency that is supposed to be pegged to the dollar. Everyone playing the game wants the prices to increase. As long as the players are depositing more 'fiat' (or real money as most of us would call it) money than they are withdrawing the game can continue. Once inflows turn negative people will run for the hills with the cash. The funny but is most people playing this game have convinced themselves 'fiat' might well be rendered worthless by crypto and have decided they never want it back anyway.

The danger though is that bitcoin is now worth some $270 billion and this changes rapidly daily. Ina major crash there is a lot of money to be destroyed.

No money will be destroyed whatsoever unless loans in 'fiat' are defaulted on as a result of people leveraging to buy and/or mine BTC and other crypto.

The whole thing is a massive waste of everybodies time and effort, if is ends this will be a good thing won't it?

But having said that I do wonder to what extent the cfd firms are gambling on their own book.

SL - Your last point is my one, there will be lots of 'unreal' damage...but unknown amounts of real damage. The total losses on sub-prime were only $300 billion direct and that caused a $15 trillion downturn.

I don't like to gamble but broke my own rule and bought some ethereum recently.I sold up today and made enough for a decent xmas but it is something that I will not repeat, something just doesn't seem right.

This classic diagram summarises the stages of a bubble:https://people.hofstra.edu/geotrans/eng/ch7en/conc7en/stages_in_a_bubble.html

Bitcoin has definitely got as far as the "Enthusiasm" stage and may already be into the "Greed" stage.

However, the inevitable crash is not going to destroy it completely. Bitcoin can be used to buy actual goods and services. It can be used as a store of value, especially for those who want to make it hard for the authorities to discover exactly where their value is stored. It is also the central node of the crypto-currency economy, as it can be traded for just about every other crypto-currency and converted back into fiat money. After the crash it will start to grow again but at a more realistic rate - the "Return to the mean" stage.

So, I think it would be worth buying Bitcoin when the price crashes to hold as a medium- to long-term investment that will steadily grow. There's also still time to get in and out before the bubble bursts, but that's a high-risk investment for people with deep pockets and a very good sense of timing.

That BTC is relatively closely held and the trade volume seems to max out at about 4 per second makes me think that I admire the nerve of anyone betting on anything like this.That the amount of power needed to keep btc running seems to be running at the same level as an underdeveloped country and rising rapidly makes me think that as a thing, this is not sustainable in green or economic terms.

Disclaimer - I have been predicting a house price crash since about 2008. One day I will be right.

I have been predicting a house price crash since about 2008. One day I will be right.

I take it you're a Londoner then? A childhood friend traded up from a 2 up 2 down red brick semi in 2006 to a 'luxury penthouse flat' in one of the plusher parts of Northumberland. He bought the 2up 2down for £35k in 2001 needing gutting. Spent £25k and a couple of years sorting it. Sold it in 2006 for £135k and forked out £250k for the smaller 'penthouse'. Back then that was half a million dollars.

A decade on those flats go on the market at £200k or $265k. I even heard of someone buying a 1 bed flat in Bedlington for £120k in 2007, she told me starter homes would never go down in price, I reckon you'd get a good 3 or dodgy 4 bed in the same area for that now.

You were right about the crash (although 2008 was a bit late to be predicting it, the queues were forming outside the Rock in September 2007). Just try looking up house prices outside of the south east, and particularly in the north east, north west, Scotland and Northern Ireland and you will see your crash.

Bitcoin is valuable because it is being hoarded. It may be true that individual bitcoins are worth 17k but the whole market is grossly over valued.

We know exactly how much a new Ford Fiesta is worth - we know how much the whole market for Ford Fiestas are worth and that's because they're all up for sale at once.

Bitcoin isn't.

In fact, to maintain its value, most of it cannot be touched. For that reason most of it is utterly useless.

For the vast majority of owners they have feel good and that's about it.

A problem arises if they choose to borrow against their hoard and create a debt bubble in fiat via commercial banks in order to compensate for the fact that, in the big scale, bitcoin cannot be utilised by the vast majority of its owners without a crash.

EkAu contraire!The cboe runs futures contracts. You never know but with a deep and orderly market, there is true price discovery and the price of by may trend towards whatever it will.Tulip mania persisted until an auction failed to sell. This was reportedly due to an outbreak of bubonic plague nearby. The simple fact that the msm is calling bubble makes me thing it might not be.

" we know how much the whole market for Ford Fiestas are worth and that's because they're all up for sale at once"

?? But they AREN'T all up for sale at once. If they were,the price would fall, but not to zero and probably not even to 50%, because

a) they have intrinsic, real value as things to get you from A to Bb) as price falls, people who might have otherwise bought Vauxhalls or Daihatsus will buy Fiestas

I'm not sure about btc as a value store, but it's pretty useful for giving people money 'privately'. Ever since that Firefox guy got sacked* for making a perfectly legal donation to a political campaign such things have been needed.

* Brendan Eich. Some one in the IRS leaked the info, no one has been fired for that.

@E-KIsn't exactly the same true of gold? Baring some limited industrial/electronics uses for it, if everyone who owns the stuff decided to cash out into USD tomorrow, gold would instantly become nigh on worthless.Same goes for fiat currency - if everyone in the UK decided to pull out of GBP (say because the government had decided to quadruple the amount in circulation) at once, the exchange rate would rapidly move to render GBP near valueless.

"Isn't exactly the same true of gold? Baring some limited industrial/electronics uses for it, if everyone who owns the stuff decided to cash out into USD tomorrow, gold would instantly become nigh on worthless.Same goes for fiat currency - if everyone in the UK decided to pull out of GBP (say because the government had decided to quadruple the amount in circulation) at once, the exchange rate would rapidly move to render GBP near valueless."

Exactly - if every holder of any asset decides to sell at the same point the price is going severely south, maybe to zero. If every house in the UK was on the market looking for a cash buyer because no existing house owner wanted to own a house any more, what would a house be worth? Not zero presumably, because sleeping in one for the night is better than a park bench, so buying one for a quid would make sense. But they'd be a worth a lot less than today for sure.

I'd say the biggest problem facing Bitcoin is not a bubble collapsing and scaring users/investors away, its the global Establishment deciding they don't want any competition to their fiat money system, so putting the mockers on it via the legal/tax systems. Once a few people do time for holding Bitcoin or not paying massive taxes levied on it, it'll die pretty quickly.

"Isn't exactly the same true of gold? Baring some limited industrial/electronics uses for it, if everyone who owns the stuff decided to cash out into USD tomorrow, gold would instantly become nigh on worthless."

It's not in bubble territory.

"Same goes for fiat currency - if everyone in the UK decided to pull out of GBP (say because the government had decided to quadruple the amount in circulation) at once, the exchange rate would rapidly move to render GBP near valueless."

Bitcoin creators claim to have democratised money - they have done the reverse. Fiat is subject to accountability, during elections or revolt. I am no statist but this must be brought under control or there will be anarchy.

Bitcoin was always marketed as something that would increase in value relative to 'fiat'. If it becomes anything it'll be a money transfer system, not a payment system for commerce.

The idea is you will be able to upload your 'money' to a server in a friendly regime (think 'tax haven') walk through the airport carrying nothing but a password in your head and collect at the other end.

But putting cash into a bitcoin atm is no less difficult to regulate against than any other money laundering, nor are money transfers to crypto exchanges. It might be a good way of moving dirty cash about via dodgy geezers I guess.

But it's basically madness, the markets have gone absolutely mad, and given the level of madness I'm seriously thinking about selling all my equities before Hogmanay.